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DB Corp: Focus on consolidation

May 10, 2012

DB Corp announced the fourth quarter results of financial year 2011-2012 (4QFY12) .The company has reported a 13.6% YoY increase in topline and a 0.5% YoY decrease in net profits respectively. Here is our analysis of the results.

Performance Summary

Top line increased by 13.6% YoY. For the full year, revenues grew by 15.7% YoY.

Growth in advertising stood at 5.4% YoY in March quarter as compared to the same quarter last year. Subscriptions grew by 16% YoY.

Operating expenses were up by 19.8% YoY mainly due to higher raw material costs. Operating profits for the quarter thus fell by 4.8% YoY. For the full year, operating profits were down by 11.9%.

Operating margins have shrunk by 4.1% during the quarter and by 7.6% during the financial year 2012.

Net profits fell by 0.5% YoY during the quarter. There was a substantial fall of 21.8% during full year FY12.

The company has declared a dividend of Rs 1.75 per share implying a dividend yield of 0.9% at current prices.

Financial performance snapshot

(Rs m)

4QFY11

4QFY12

Change

FY11

FY12

Change

Net sales

3,174

3,606

13.6%

12,652

14,638

15.7%

Expenditure

2,378

2,849

19.8%

8,621

11,088

28.6%

Operating profit (EBDITA)

796

758

-4.8%

4,031

3,550

-11.9%

EBDITA margin (%)

25.1%

21.0%

-4.1%

31.9%

24.3%

-7.6%

Other income

36

34

-5.4%

142

115

-18.7%

Interest

34

(19)

-155.9%

153

155

1.5%

Depreciation & amortisation

111

130

17.0%

433

506

16.8%

Profit before tax

687

681

-0.9%

3,587

3,005

-16.2%

Profit before tax margin (%)

21.6%

18.9%

28.4%

20.5%

Tax

235

229

-2.9%

1,000

982

-1.8%

Profit after tax before minority

451

452

0.2%

2,587

2,023

-21.8%

Share of minority

(1)

2

(3)

(2)

Profit after tax

453

450

-0.5%

2,590

2,024

-21.8%

Net profit margin (%)

14.3%

12.5%

20.5%

13.8%

No. of shares (m)

183.31

Diluted earnings per share (Rs)*

8.6

P/E (x)

23.9

(*trailing twelve month earnings)

What has driven performance in 4QFY12?

Total revenues for DB Corp were up by 13.6% YoY in FY12. Growth in circulation revenues was 16.4% YoY while advertisement revenues grew by a meagre 5.4% YoY. This was mainly because of weak economic scenario, especially slower growth in the automobile space.

Costs of raw materials shot up by 25% YoY while staff cost too inflated by 24% YoY. Total operating expenditure was thus up by 20% YoY. This resulted in a fall of 4.8% YoY in the operating profits of the media company for the quarter. For the full year, operating profits were down by 11.9%.

Operating margins have shrunk by 4.1% during the quarter and by 7.6% during the financial year 2012.

Cost break-up

(% of sales)

4QFY11

4QFY12

Change

FY11

FY12

Change

Raw materials consumed

1,042

1,301

24.9%

3,838

5,080

32.3%

% sales

32.8%

36.1%

30.3%

34.7%

Staff cost

492

610

24.0%

1,846

2,429

31.6%

% sales

15.5%

16.9%

14.6%

16.6%

Other expenses

844

937

11.0%

2,937

3,579

21.8%

% sales

26.6%

26.0%

23.2%

24.4%

Total expenditure

2,378

2,849

8,621

11,088

Net profits fell by 0.5% YoY during the quarter. There was a substantial fall of 21.8% during full year 2011-12.

What to expect?

At the current price of Rs 204, the stock is trading at a multiple of 10 times our estimated FY14 earnings. In FY2011-12, DB Corp aggressively expanded its operations in Jharkhand and Maharashtra. The media company now wants to focus on consolidating its business in these new markets as well as the mature ones. Plans to launch in Bihar have also been deferred by a year. DB Corp faces new challenge in Madhya Pradesh where it has a strong foothold in the form of highest markets share. Its competitor Jagran Prakashan has bought out no 3 player in that region and has ambitious plans of expanding its footprint. As per the management of DB Corp, this will give them an opportunity to further strengthen their strong position in those markets.

Newspaper companies get most of their revenues from advertising. For DB Corp ads accounted for almost 77% of overall revenues for the company in the last year (2011-12). The company has an ambitious target of garnering 20% growth in advertising revenues in FY 13. With economic scenario not looking too bright, we feel that revenues from advertising will be hard to come by and the company may not be able to achieve its target. Also, with the volatility in rupee dollar rates, the cost of imported newsprint will be dearer, thereby impacting the profit margins adversely. We maintain our negative view on the stock.

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